In managing your small business, keeping tight control over spending is important. While you don’t want to overspend and reduce your profit margin, you will also have necessary expenses that you’ll need to pay out each month. Fortunately, there are steps you can take to keep your finances from getting out of control. Here are a few ways you can manage your finances better as you grow your small business.
Start an Emergency Fund
Homeowners are often advised to maintain a household emergency fund to help them cover financial emergencies without having to borrow money or run up their credit card debt. For those same reasons, you should start a savings account for your business and contribute to it regularly. It may be even more important to create this type of savings fund for your business than it is for homeowners because so much more can go wrong with a business. From damage to your physical store to suffering the economic consequences of a data breach, having an emergency savings account can help you recover from a financial hardship a little easier.
Pay a Salary to Yourself
A common mistake many small business owners make is to simply withdraw money from their business accounts as they need it rather than to pay themselves a specific salary. This can end up harming your business’ finances more than you realize, and it can create a murky legal situation if someone files a liability claim against your business. It’s a better practice to pay yourself a salary and to ensure that’s the only money you use for your personal finances. As you start your business, you should pay yourself a small salary, but, as your business grows, you can increase that salary accordingly.
Don’t Resist the Outsourcing Trend
There’s a good reason that both new and established businesses are making more use of third-party services in the operation of their organizations. They save on the human resources costs of hiring their own employees, and they get the professional results that help their businesses run more efficiently. You can use an ACH processing service for helping you pay your employees, and the same service can help you process payments from your customers. You can also find third-party services to assist you with your business’ accounting, janitorial, and IT needs. There’s no limit to the types of services you can outsource to a third-party company. By making use of these services, you can manage a fully operational business without having to hire a full staff.
Reinvest Profits in Your Business
It’s easy to get excited about improving your business, but you shouldn’t let your ambition tempt you into making poor financial decisions. Instead of borrowing money to upgrade or expand your business, it’s better to hold off on your plans until you can pay for upgrades with your own profits. Alternatively, you can use your personal savings to build or expand your business to enjoy similar financial benefits. By paying for upgrades out of your profits, you’ll be avoiding the need to borrow as much money from a lender. Even if you have just enough capital to pay for half of the investment, that’s still a significant amount you won’t have to borrow. That will help you maintain a better profit margin, while preventing you from borrowing against your business’ future success.
Use Your Credit Wisely
Establishing good credit for your business is just as important as establishing good personal credit. This means knowing how and when to use your business’ credit. The rules for businesses are basically the same as the rules for establishing good personal credit. You’ll need to make monthly payments on time, maintain a good credit to debt ratio, and establish a good repayment history. Once you have good credit, you’ll be able to get better terms for business credit cards and business loans. If you do need to borrow money to rebuild or expand your business, having the solid backing of a good credit history can increase your chances for getting the approval on a loan with more favorable repayment terms.
You can learn more about operating a more cost-effective business by doing some research on your own. There may even be more cost-effective ways of serving your customers that will improve the quality of service your business provides. Look for more finance tips online, ask your employees, or network with other business owners in your community.